The IMF said in a research paper that a revival of growth in Europe is required to reverse "the vicious cycle of poor confidence, flagging growth, fiscal weakness and bank vulnerability."

European countries must undertake coordinated reforms to re-balance demand and competitiveness across the continent, the IMF said. That means allowing for higher inflation and wages in the north, in stronger economies like Germany, while holding down wages in the south, in struggling nations like Italy.

In addition, the paper calls for pension reforms and more flexible labor markets, and says monetary policy should "remain supportive."

"This is not a recommendation of simple fiscal stimulus -- fiscal consolidation is inevitable -- but of a combination of efforts to alleviate headwinds," the IMF said.

The IMF's analysis comes amid increasing complaints that Europe's leaders have been choking off recovery by pushing austerity measures.

European leaders signed an accord earlier this year that aims to promote greater fiscal discipline by holding countries to budgetary targets.

But many of the continent's economies have tumbled into recession as austerity measures -- budget cuts and tax hikes -- take a toll on growth and fuel popular resentment. Countries like Greece and Spain are suffering from unemployment rates over 20%, which have led to worries about social unrest.